The Benefits of Choice: the Battle Never Ends

Do consumer choice and competition between suppliers improve the quality of outcomes for consumers? The answer might seem so obvious to many readers that it is hardly worth asking. But a powerful strand of political opinion is building up to an attack on the concept.

Mary Creagh, the new Labour shadow Transport Secretary said last week she was ‘open’ to the idea of returning all train services to state control. The damaging reports on the Islamic free school in Derby have led to sustained attacks on the whole concept of free schools. Certainly, a substantial part of the electorate appears to be opposed to profit-oriented companies providing services in sectors such as education and health, as a Policy Exchange report showed last year. This is not quite the same as a blanket dismissal of competition, but there is a general unease about markets, especially in the light of the financial crisis.

Ever since cars were invented, railways have faced competition, and the spread of car ownership after the Second World War intensified it. The post-war peak in rail journeys was some 1.1 billion in the mid-1950s, a figure which fell steadily to a trough of around 750 million in the mid-1990s. Following privatisation, massive investment programmes have been carried out. Journey numbers have risen, passing the 1 billion mark in 2003, to the current level of 1.5 billion, a figure not seen since the early 1920s, when road competition was very weak.

The key to this success was the much-maligned institutional framework which was set up by privatisation. In the form of the train operating companies, there is now, for the first time ever, a distinct part of the industry whose priority focus is the consumer. They only make money if people use their services. They may be imperfect, but they have doubled the number of journeys during the two decades of privatisation.

A very interesting article in the latest issue of the American Economic Association’s journal Economic Policy looks at the impact of introducing competition into the NHS. In 2006, the NHS mandated that all patients requiring treatment be given the choice of five different hospitals and adopted a payment system in which hospitals were paid fixed, regulated prices for treating patients. Because the prices were fixed, managers had to compete on quality.

The analysis has to encompass some highly technical issues, but the results are very clear. Amidst all the rows about closures of local hospitals, what actually happened was that “the share of patients bypassing their nearest hospital increased for better hospitals while it clearly decreased for worse hospitals”. Further, the policy saved lives without increasing costs.

Markets are neither the simple supply and demand diagrams of the basic textbooks, nor are they the unregulated free-for-all of contemporary fears. Choice and competition can be introduced successfully into highly regulated and complex institutional structures such as rail and health. And where this has happened, there have been very clear benefits. This message cannot be repeated often enough.

The Volterra Blog

The Volterra Team is made up of a vibrant mix of economists and mathematicians - this blog is their chance to air their opinions of recent economic news and developments. As in the best of discussions - opinions will differ - so do comment and let them know your point of view!

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